Additional Notes on the Analysis of the Patient Choice, Affordability, Responsibility, and Empowerment Act

Last month, the Center for Health and Economy (H&E) released a comprehensive report on effects the of the Patient Choice, Affordability, Responsibility, and Empowerment Act (CARE Act) on health insurance premiums, health insurance coverage, access to health care providers, medical service productivity, and the federal budget. The analysis raised a number of questions on the details of our assumptions and context of our projections. Here, we attempt to elucidate our methodology and clarify the appropriate interpretation of our results.

Details on Premium Impact Estimates

H&E health insurance premium estimates are based on five plan design categories offered in the individual market: high Preferred Provider Organization (PPO), medium PPO, low PPO, narrow network, and Health Savings Account (HSA)/High Deductible Health Plan (HDHP).[1] The high, medium, and low PPO plans are similar to the Platinum, Gold, and Silver plans defined by the Affordable Care Act (ACA); Among PPO plans, the benefit and cost-sharing design in most generous in high plans—analogous to Platinum—and least generous in the low plans—analogous to Silver. Narrow network plans have a slightly less generous plan design than the low PPO plans and offer a smaller network of health care providers from which enrollees can choose. And the least generous plan design included in our analysis is the HSA/HDHP. These plans pair very high deductibles, e.g. $5,000 and greater, with health savings accounts that enrollees can use to spend tax-free dollars on medical expenses. These types of plans are sometimes referred to as ‘catastrophic coverage.’ All premium estimates reflect health insurance prices without any financial assistance.

The primary mechanisms through which premium estimates under the CARE Act differ from H&E estimates under current law are changes in regulations regarding benefit generosity and plan pricing. The CARE Act proposes four significant such policies: repeal community rating and other actuarial pricing restrictions, repeal essential health benefit requirements, repeal the individual mandate, and allow insurance premiums to be paid using HSA funds.[1] Insurance premium estimates are also altered relative to the baseline by changes in enrollee mix that occur as a result of these policies as well other policies that may affect health insurance choice, such as premium subsidies or cost-sharing benefits. As the results show, H&E estimates that the net impact of these policies is a decrease in insurance premiums of varying degree in every plan design category relative to current law.

Under current law, health insurance plans are only able to alter prices based on four factors: single or family coverage, geographic location, age (a maximum ratio of 3:1), and tobacco use (a maximum ratio of 1.5:1). High-risk individuals who would otherwise pay higher than average premiums benefit from such restrictions, leading high-risk individuals to gain coverage in higher numbers. Similarly, some low-cost individuals, for whom a close-to-average premium is not worth it, will drop insurance coverage. Thus, the effect of these regulations is to both reduce variation in health insurance premiums and raise the average health insurance premium. Accordingly, H&E projects that the net effect of removing these restrictions is a decrease in average insurance premiums.

The ACA mandates that health insurance plans cover Essential Health Benefits (EHB). These benefits include maternity care, mental health services, and other benefits that might not otherwise be included in a health insurance plan. Repealing the EHB requirements allows health insurance plans to remove more costly benefits in exchange for less expensive premiums. H&E finds that removing the EHB requirements will lead to a net decrease in health insurance premiums.

The individual mandate, as detailed by the Individual Shared Responsibility provision, requires that all individuals who fail to obtain qualified health insurance coverage pay a penalty. This penalty encourages healthy individuals who forgo health insurance because of low medical service usage to join the pool of insured premiums, the opposite effect of the moral hazard introduced by community rating. These enrollees, who may otherwise forgo health insurance, lead to lower average health insurance premiums for the insured pool. Thus, H&E estimates that repealing the individual mandate will lead to increased average health insurance premiums.

The proposal also allows for the purchase of health insurance using tax-free HSA funds. It is not common for HSAs to be large enough to be able to pay for a significant amount of annual health insurance premiums, and is restricted by annual contribution limits. H&E estimates that this provision will lead to a decrease in health insurance premiums for those who have the available funds, but this effect is small compared to other factors affecting premium prices.

Details on Health Insurance Coverage Estimates

The insurance coverage estimates displayed in the H&E analysis of the CARE Act are the results of our plan choice microsimulation.[2] Similar to the plans offered in the individual market, large-group health insurance plans offered by employers are categorized by plan design and cost-sharing structure. The three available PPO plans and the narrow network plan are equivalent in plan design to the plan categories available in the individual market. The HSA/HDHP-Employee Pays plan is equivalent to the HSA/HDHP in the individual market and represents employees’ option to forgo the employer sponsored insurance options. In contrast, the HSA/HDHP-Employer Pays plan is a similar plan design but offered with employer contributions. There are two insurance plan categories specific to the large-group market: Health Maintenance Organization (HMO) and Health Reimbursement Account (HRA). An HMO plan is a low-deductible health insurance plan that is designed to contain health care costs. And an HRA is an account set up by an employer to reimburse employees for out-of-pocket medical expenses and individual market insurance premiums. In addition to the individual market and employer sponsored insurance coverage estimates, we also estimate Medicaid enrollment. For estimation purposes, small-group insurance is included in our individual market estimates.

As explained in the previous section, H&E estimates the proposal will lead to a net decrease in individual insurance market premiums, which in turn will lead to a net increase in the number insured through the individual market. Our estimates for changes in the insured population relative to current law are a result of these lower estimated premiums and two other main factors: the change in premium subsidy availability and the repeal of Medicaid expansion. H&E estimates that the net effect of these provisions is a 1 percent increase in the insured population by 2023 relative to current law.

The CARE Act alters the structure of the health insurance premium subsidies currently available in the Health Insurance Marketplace. Under the Affordable Care Act, premium subsidies declining with income are available to households that earn between 100 and 400 percent of the Federal Poverty Level (FPL). The subsidies are based on a formula that allows a household to purchase a medium PPO plan—a Silver plan—for a certain percent of their income. The proposal implements lower average subsidies, based on a flat amount that declines with income, for individuals and families earning up to 300 percent of FPL. The proposal does not restrict the subsidies to health insurance plans that meet certain actuarial standards as is specified under current law, making less generous health insurance plans eligible for premium subsidies. In addition, the proposal repeals the provisions under current law that grant cost-sharing benefits to households earning less than 250 percent of FPL which allows those households to purchase comprehensive health insurance for the price of a cheaper plan. As a result, H&E estimates that enrollment in narrow network plans and HSA/HDHPs in the individual market will increase, while enrollment in more comprehensive plans will decline.

The proposal also calls for the rollback of the Medicaid expansion implemented by the ACA, which makes federal funds available to states that expand Medicaid to cover individuals and families earning below 138 percent of FPL. The reduction in Medicaid enrollment under the proposal is softened by the premium credits newly available for individuals and families that earn below 100 percent of FPL, as some of these households will use the credit to obtain private health insurance. This also contributes to the increase in the individual insurance market enrollment.

Interpretation of the Budget Impact Table

There has been some amount of confusion on how to appropriately interpret the H&E budget impact tables. The analysis of the CARE Act contains two budget impact tables: Spending Projections Under the Care Act and Budget Impact of the CARE Act. The first table, Spending Projections Under the Care Act, displays the net budgetary effects of outlays and revenues of health insurance coverage provisions associated with health reform. Between 2014 and 2016, before the proposal is implemented, the table displays the estimated net of spending and revenue that result from the insurance coverage provisions of the ACA. After 2017, the net budgetary effect reflects the insurance coverage provisions of the CARE Act. The second table, Budget Impact of the CARE Act displays the net budgetary effect of replacing the insurance coverage provisions of the ACA with those of the CARE Act. Thus, before 2017, there is no net effect. After 2017, the table displays the difference between the estimate budgetary effect of the CARE Act and the projected baseline spending under the ACA.

In light of the frequent misinterpretation of the H&E budget impact tables, we propose a new table format:

Budget Impact of the CARE Act (in billions)


2014 – 2016





10 Year

Change in Source of Funds[2]
Taxes on Employer Sponsored Health Insurance







Individual and Employer Mandate Taxes














Change in Use of Funds[3]
Medicaid Coverage Provisions







Medical Malpractice Reform







Health Insurance Premium Tax Credits














Change in Budget Surplus








The new Budget Impact table is divided into two sections: Source of Funds refers to changes in dollars raised by the federal government and Uses of Funds refers to changes of dollars spent by the federal government. Many of the insurance coverage provisions of both current law and the Alternative disseminate financial benefits through tax credits. Technically, these provisions reduce the effective tax rate and would lead to less money raised—except in cases where the tax credit exceeds a households total tax obligation. However, in the interest of simplicity and clarity, these “tax expenditures” are categorized as Uses of Funds in H&E budget estimates.

Details on the Federal Budget Impact Estimates

In its analysis of a proposal’s impact on the federal budget, H&E looks only at provisions directly related to health insurance coverage. For proposals that repeal the ACA—such as the CARE Act—there are a number of tax policy changes that are not directly related to health insurance coverage and are thus not included in our budget impact analysis.  In July 2012, the Congressional Budget Office (CBO) estimated that the net effect on the budget of repealing the non-coverage provisions of the ACA is a deficit increase of $1.28 trillion over ten years.[3] H&E projects that the insurance coverage provisions of the CARE Act will decrease the budget deficit by $1.47 trillion over ten years.

The insurance coverage provisions of the CARE Act alter the source of federal funds through changes to two policy mechanisms: taxes on employer sponsored health insurance and the coverage mandates for individuals and employers. Under current law, employer sponsored health insurance benefits in excess of $10,200 for singles and $27,500 for families will be subject to a 40 percent tax (commonly called the “Cadillac tax”) beginning in 2018. The CARE Act replaces this provision by subjecting all employer sponsored health insurance benefits in excess of 65 percent of a high-cost plan beginning in 2017, which we estimate to be $6,320 for singles and $13,160 for families. H&E estimates the net effect of replacing the Cadillac tax with the taxation of employer sponsored insurance under the CARE Act is a decrease in the deficit of $1.18 trillion over ten years.

The CARE Act also repeals the individual insurance mandate and the mandate on employers to offer qualified health insurance, which H&E estimates will increase the deficit by $126 billion over ten years. The net budget impact of the CARE Act on sources of federal funds is projected to be a deficit decrease of $1.06 trillion over ten years.

The insurance coverage provisions of the CARE Act alter the use of federal funds through three primary policy mechanisms: Medicaid reform, medical malpractice reform, and altered structure of health insurance premium tax credits. The primary savings in Medicaid reform under the CARE Act are a result of reversing the expansion of Medicaid included in the ACA—states no longer have the option to use federal funds to insure all households earning up to 138 percent of the federal poverty level. Some additional savings come from the block-grant funding system implemented by the CARE Act. H&E estimates that the Medicaid reform provisions of the CARE Act will decrease the deficit by $193 billion over ten years.

The H&E estimates on the impact of medical malpractice reform are created by synthesizing previous research on the topic. We attempt wherever possible to make original estimates of the budgetary effect of policy provisions related to insurance coverage. However, there are some policy areas for which H&E has not yet developed the capacity to conduct independent analysis. In the interest of providing a complete depiction of a proposals impact, we use relevant economic literature and estimates by CBO and the Joint Committee on Taxation (JCT) to augment our analyses.

The effects of reforming medical liability have been frequently researched, but with mixed results. Early findings suggested that the result of reform was ambiguous, with little statistically significant impact on premium prices.[4] However, more recent research has been successful in finding empirical evidence for reducing health care costs through tort reform. Avraham, Dafny, and Schanzenbach are able to show direct evidence that medical malpractice reforms could reduce health care costs in aggregate, reducing insurance premiums by 1 to 2 percent.[5] In 2013, CBO estimated that a variety of reforms would lead to budgetary savings of $66 billion over 10 years.[6] Accounting for the details of this research and the specific reforms included in the CARE Act, H&E estimates that medical malpractice reform under the CARE Act will lead to budgetary savings of $45 million over ten years.

The CARE Act alters the structure of the health insurance premium subsidies and cost-sharing benefits established by the ACA. H&E estimates that the net impact of the changes in health insurance premium subsidies on the uses of federal funds is a decrease in the deficit of $178 billion over ten years. The savings under the CARE Act diminish throughout the analysis period from a savings of $52 billion in 2017 to a cost increase of $7 billion in 2023. The fast growth of subsidy spending under the CARE Act relative to current law is in part caused by repealing subsidy adjustment mandates specified by the ACA. Under current law, subsidy spending after 2018 is controlled to remain approximately constant as a percentage of gross domestic product (GDP), leading to a sharp decline in average tax credits.

Uncertainty in H&E Projections

As with all economic forecasting, H&E estimates are associated with substantial uncertainty. While our estimates provide good indication on the nation’s health care outlook, there are a wide range of possible scenarios that can result from policy changes, and the current policy environment is unlikely to remain unchanged throughout our entire ten-year analysis period. For instance, the uncertainty surrounding the implementation of the Affordable Care Act and similar obstacles facing the implementation of new health care overhauls affect the accuracy of short-term coverage estimates. In analyzing the CARE Act, it is likely that the subsidized health insurance exchanges will be fully functional and stable by 2017, but it is difficult to approximate the costs associated with the new implementation of the proposal in 2017. Importantly, we do not believe that the uncertainty in our estimates creates biased results. In other words, H&E predictions are not more likely to overestimate rather than underestimate the effects of a proposal. We attempt to project the most likely scenarios, but actual events may differ significantly from our predictions.


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[1] In this paper, the “individual market” refers to the commercial, non-group market for health insurance.

[2] Positive values denote increases in revenue and negative values denote decreases in revenue.

[3] Positive values denote increases in spending and negative values denote decreases in spending.

[1] The CARE Act repeals the guaranteed issue provisions of the ACA but retains renewable coverage protections and grants guaranteed issue to enrollees during the initial open season of the proposal. H&E assumes that the difference in these policies is negligible with respect to health insurance coverage and premiums.

[2] Parente, S.T., Feldman, R. “Micro-simulation of Private Health Insurance and Medicaid Take-up Following the U.S. Supreme Court Decision Upholding the Affordable Care Act.” Health Services Research. 2013 Apr; 48(2 Pt 2):826-49.

[3] Elmendorf, Douglas W., “Letter to the Honorable John Boehner providing an estimate for H.R. 6079, the Repeal of Obamacare Act,” Congressional Budget Office, July 24, 2012, available at:

[4] Kessler, Daniel and McClellan, Mark, “Do Doctors Practice Defensive Medicine?” Quarterly Journal of Economics, May 1996; Morrisey, Michael et al, “Medical Malpractice Reform and Employer-Sponsored Health Insurance Premiums,” Health Services Research, December 2008, available at:

[5] Avraham, Ronen et al, “The Impact of Tort Reform on Employer-Sponsored Health Insurance Premiums,” Working Paper Series, National Bureau of Economic Research, September 2009, available at:

[6] Ibid.